A rationalization of CEO Ullman's acquisition of a stake in J.C. Penney. How does his investment stand in light of the company's operational hurdles and rising competition from Macy's and Dillard's.

There aren't too many things that get investors jumping for joy more than executives buying large stakes in their own companies. This is especially true when the executive is the CEO and the company is struggling for survival. One great example is J.C. Penney Company(NYSE:JCP).

Recently, news broke that the company's CEO, Mike Ullman, purchased a little over $1 million worth of stock in the retailer at an average purchase price of $8.95. In response to the news, shares of the company rallied 3.61% to close at $9.19. The party extended after hours as shares rose an additional 2.61% to $9.43. Is Mr. Market overreacting or is this the beginning of even better things to come?

A look back at J.C. PenneyJ.C. Penney has been having a rough time lately. From 2011 through 2012, sales dropped 24.8% to $13 billion and the company's net loss widened from -$152 million to -$985 million. Although the shift to buying products online likely had some role to play in the company's declining prospects, its misfortunes are largely attributed to a failed turnaround attempt initiated by Ron Johnson, the company's one-time CEO.

Over the past several years, business deteriorated as consumers shifted to other retailers like Macy's(NYSE:M) and Dillard's(NYSE:DDS). From 2010 through 2012, Dillard's saw its revenue rise by 8.4% from $6.23 billion to $6.75 billion. Macy's performed even better, with revenue increasing 17.9% over the same time frame.

On top of increased revenue, both Macy's and Dillard's saw their bottom lines improve tremendously. Macy's saw net income rise by 305.8% from $329 million to $1.34 billion, while Dillard's experienced an even more impressive 390.5% rise from $68.5 million to $336 million. Higher revenue helped drive profit for these companies, along with management initiatives to improve margins.

Unfortunately, on top of being operationally inflexible (as demonstrated by its operating costs rising as a percentage of sales), J.C. Penney has been plagued by high interest costs on its debt and substantial impairment charges. All of these factors have pushed profitability into the hole and they have continued into the company's current fiscal year. In the company's second fiscal quarter, it took a net loss of $586 million, followed by a $489 million loss in its third quarter.

What does the share acquisition really mean?Despite the hard times J.C. Penney has been facing lately, there is a bit of a bright side. While comparable-store sales are down year-to-date, the company reported that its comparable-store sales rose 0.9% in October. This represents the first monthly increase in sales since 2011 and it has incentivized institutional investors to take a closer look at the company's viability.

These facts, combined with Ullman's investment, may signify that the worst for J.C. Penney is behind it. However, this isn't a universal truth. While insider purchases tend to imply an increase in future profitability, investors should not rely on them as definitive proof.

In the case of Ullman, you can get a general idea of the nature of the transaction by considering what he has at stake. In 2011, the year he initially retired to allow Ron Johnson to take the helm, Ullman was granted $34.56 million in compensation. Now, admittedly, a vast majority of this was in the form of either stock-based compensation or a "transition" payment due to his exit. However, even in 2009, when he did not receive any outsized stock awards or significant one-time payments, his total pay came out to $8.8 million. In fact, over the three years ending in 2011 his total compensation came out to $56.47 million.

Foolish takeawayBased on this data, we can see that J.C. Penney has been having a difficult time these past few years, especially in comparison with Macy's and Dillard's. Though early in the process, it also appears the company is beginning to turn itself around, but anything substantial is likely a long way off. Using these conclusions, Ullman may have bought shares in anticipation of a brighter future for the company, but this is not a given.

Rather, it is entirely possible that the $1 million he spent on shares (which equals 1.8% of his last three years worth of compensation before Johnson took over), was for the sole purpose of getting investors excited. Using this rationale, it's not too hard to imagine Ullman being willing to make this kind of bet with the hope that Mr. Market will push shares higher. If this was indeed his intention, then the higher share price could allow the company to sell additional shares at a greater premium and/or incite institutions to take larger stakes, giving J.C. Penney more leverage to pull off a recovery in the months and years to come.

Author

Dan is a Select Freelance writer for The Motley Fool. He focuses primarily on the Consumer Goods sector but also likes to dive in on interesting topics involving energy, industrials, and macroeconomics!